T. Rowe Price Spectrum Income Fund NCSRS Certified semi-annual shareholder report (management investment company)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act File Number: 811-04998

T. Rowe Price Spectrum Fund, Inc.

(Exact name of registrant as specified in charter)

100 East Pratt Street, Baltimore, MD 21202

(Address of principal executive offices)

David Oestreicher

100 East Pratt Street, Baltimore, MD 21202

(Name and address of agent for service)

Registrant’s telephone number, including area code: (410) 345-2000

Date of fiscal year end: December 31

Date of reporting period: June 30, 2012

Item 1. Report to Shareholders

Spectrum Fund

June 30, 2012

The views and opinions in this report were current as of June 30, 2012. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.

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Manager’s Letter

Fellow Shareholders

U.S. stocks gained in the first half of 2012, driven entirely by a strong first-quarter rally as the U.S. economy strengthened and European leaders took steps to contain the region’s debt crisis. Stocks pared some of their gains in the second quarter, however, as the eurozone crisis entered a new phase centered on Spain and global economic data weakened. U.S. bonds advanced, supported by long-term U.S. Treasuries, as Europe’s turmoil and uncertainty about the global outlook spurred demand for more conservative assets. Outside the U.S., stock markets in developed markets rose modestly due to strength in Asia and most of Europe but fell sharply in some troubled peripheral eurozone countries.

MARKET ENVIRONMENT

U.S. stocks rallied sharply in the first quarter as the economy showed signs of improvement and European leaders made progress in containing the region’s debt crisis. However, the tenor of economic news turned more negative in the spring. After growing strongly in the first quarter, monthly jobs growth from April to June weakened and the unemployment rate remained stuck at 8.2%, reinforcing other indicators suggesting that the U.S. recovery was losing steam. Investors also grew anxious about a slowdown in China, where data increasingly showed that the world’s second-largest economy was cooling after decades of rapid growth. The S&P 500 rose to its highest level in almost four years on April 2, 2012, but erased much of its year-to-date gains by June 1 before clawing its way higher by month-end amid heightened anxiety about the global outlook.

Europe’s fiscal problems continued to dominate investor sentiment. The worsening debt crisis upended the political landscape in several countries and reignited worries about a disorderly Greek default and the survival of the currency zone. By the end of our reporting period, Spain sought a bailout for its troubled banks, Greece voted for a party committed to staying in the euro and forming a coalition government, and European leaders agreed on new measures to contain the crisis. The latest summit produced some positive steps toward closer economic integration but once again left many details unaddressed and failed to resolve fundamental problems facing the eurozone. Most European markets produced decent returns, but stock markets in Greece, Italy, Spain, and Portugal fell as they struggled with recession and austerity measures. Developed Asian markets rose. Emerging markets stocks outpaced their developed market peers, though economic growth in China, Brazil, and India slowed markedly during the period.

U.S. bonds generated moderate gains in the year’s first half. In the investment-grade universe, corporate bonds did very well and longer-term Treasuries posted solid gains as global uncertainty spurred investors to seek refuge in U.S. government debt. In June, the Federal Reserve said it would extend until year-end a stimulus program aimed at suppressing long-term interest rates by selling short-term securities and using the proceeds to buy longer-term securities. The extension of the program, known as “Operation Twist,” helped sustain demand for longer-dated Treasuries. High yield outpaced investment-grade bonds as yield-hungry investors sought greater returns in a low interest rate environment. Outside the U.S., sovereign bonds in developed Europe posted mild gains in dollar terms as the dollar strengthened against the euro and other major currencies. Bonds in emerging markets fared considerably better than sovereign bonds in developed markets—a testament to their generally lower debt levels and stronger growth outlook relative to developed markets.

SPECTRUM GROWTH FUND

The Spectrum Growth Fund returned 8.30% for the six months ended June 30, 2012, trailing the Russell 3000 Index but outpacing the Lipper Multi-Cap Core Funds Index. All of the underlying funds posted positive absolute returns. Within the U.S. holdings, the Growth Stock and Blue Chip Growth Funds posted strong absolute and relative performance, but the Value Fund weighed on relative returns. Additionally, the fund’s out-of-benchmark allocation to non-U.S. stocks hurt performance against the Russell 3000 Index, which represents the broad U.S. equity market. The fund’s underlying non-U.S. funds—the International Stock, International Growth & Income, and Emerging Markets Stock Funds—posted modest returns but lagged the performance of the domestic equity funds. Finally, the Real Assets Fund weighed on relative returns. This fund, which invests mostly in assets with physical properties such as energy, commodities, and infrastructure, was hampered by a steep drop in energy prices, particularly for oil and natural gas.

The Spectrum Growth Fund invests in a range of underlying funds that focus on domestic stocks across the capitalization scale, international stocks in developed and emerging markets, and growth and value stocks. Our current strategy is neutral between U.S. and non-U.S. stocks. U.S. corporate earnings are healthy and stock prices are attractive compared with their historical levels, though we expect earnings growth will moderate given recent signs of weakness in the economy. Equity valuations outside the U.S. are less expensive and, we believe, are pricing in dimmer growth prospects in Europe and other developed markets.

Since 2011, we have been gradually increasing the fund’s international equity exposure from 20% to approximately 30% of its traditional equity allocation while proportionately reducing U.S. equities. International developed and emerging markets stocks have risen as a percentage of the global equity market and now represent over half of the world market capitalization. These areas often include countries that enjoy faster economic growth rates than the U.S. and offer attractive investment opportunities that complement the fund’s U.S. holdings. We anticipate completing this transition in the coming months.

Within non-U.S. equities, we continue to favor emerging markets, which we believe have greater long-term growth opportunities compared with developed markets. Emerging markets generally carry far less debt than developed markets and have implemented conservative fiscal policies that make them better equipped to withstand a global crisis than in past years. Although weaker global demand may challenge export-driven markets like China and Brazil, inflation has generally subsided, which should allow room for looser monetary policy. For valuation reasons, we are underweight small-cap stocks in favor of large-caps and prefer growth stocks over value.

SPECTRUM INCOME FUND

The Spectrum Income Fund returned 4.70% for the six months ended June 30, 2012, easily outpacing both the Barclays U.S. Aggregate Bond Index and the Lipper General Bond Funds Average. The fund’s out-of-benchmark holdings drove absolute and relative performance over the period. Specifically, holdings in the Equity Income, High Yield, and Emerging Markets Bond Funds—which invest in dividend-paying stocks, high yield bonds, and emerging markets debt, respectively—drove outperformance against the Barclays index, which represents the broad U.S. investment-grade bond market. However, an allocation to non-U.S. debt through the International Bond Fund weighed on relative results.

Allocations to diversifying sectors such as dividend-paying stocks, high yield bonds, and non-U.S. debt are key features of the Spectrum Income Fund’s design and have contributed to outperformance against the Barclays index over the past 10 years, as seen in the Growth of $10,000 chart on page 13. We continue to favor high yield over investment-grade bonds. Many high yield bond issuers have taken advantage of low interest rates to refinance debt, extend maturities, and shore up their balance sheets. Yield spreads relative to other sectors remain at attractive levels in the current low-yield environment, particularly given our outlook for a slowly improving economy. We also favor emerging markets over U.S. investment-grade bonds. Emerging markets generally have stronger fiscal profiles than most developed countries that are now struggling with high debt and low growth and have better long-term growth prospects than their developed peers.

SPECTRUM INTERNATIONAL FUND

The Spectrum International Fund returned 5.36% for the six months ended June 30, 2012, widely exceeding its benchmark, the MSCI All Country World Index ex USA, as well as the Lipper International Multi-Cap Growth Funds Average. The International Stock, European Stock, and New Asia Funds were the top contributors to absolute returns. Within the underlying funds, stock selection in developed Europe—particularly the UK and Germany—aided absolute performance. Conversely, holdings in Brazil weighed on returns. Brazil’s market slumped over the past six months as its export-driven economy grappled with the impact of weaker commodities demand from China, a fragile U.S. recovery, and recession in Europe.

Europe remains the fund’s biggest regional exposure, followed by the Pacific ex Japan. As we stated earlier, we believe emerging markets stocks have stronger long-term growth potential over developed markets. While recent headlines have highlighted economic slowdowns in China, India, and Brazil, emerging markets are unfettered by the formidable debt and fiscal challenges facing the U.S. and Europe and have greater flexibility to respond to financial challenges that may arise. A rapidly growing middle class, rising consumption, and increasing upward mobility are hallmarks of emerging markets, and we believe these trends will continue to drive strong long-term growth.

OUTLOOK

Our global growth expectations are modest for the next several quarters. We expect the U.S. economy to continue along a course of low growth in an environment of abundant policy uncertainties and weakness abroad. Continued job and income growth remain critical for a self-sustained recovery, although employment data have recently softened and suggest cautious hiring ahead. Global financial markets remain volatile over the uncertainty associated with the European debt crisis; Greece’s potential exit from the euro; and leaders’ incremental approach to policymaking in the region, which allows contagion risk to linger. We believe that risk aversion will remain high and markets will stay volatile until the eurozone crisis approaches a resolution.

Notwithstanding these risks, U.S. corporate earnings growth and balance sheets appear strong, and stocks, particularly large-caps, are reasonably valued. We believe that the prevailing geopolitical uncertainty underscores the value of the Spectrum Funds’ diversified holdings and investment approach.

Thank you for investing with T. Rowe Price.

Respectfully submitted,

Charles M. Shriver
Portfolio manager, Spectrum Growth, Spectrum Income, and Spectrum International Funds

July 20, 2012

GLOSSARY

Barclays U.S. Aggregate Bond Index: An unmanaged index that tracks investment-grade corporate and government bonds.

J.P. Morgan Non-U.S. Dollar Government Bond Index: An unmanaged index that tracks the performance of major non-U.S. bond markets.

Lipper indexes: Fund benchmarks that consist of a small number of the largest mutual funds in a particular category as tracked by Lipper Inc.

MSCI All Country World Index ex USA: An index that measures equity market performance of developed and emerging countries, excluding the U.S.

MSCI EAFE Index: An unmanaged index that tracks the stocks of about 1,000 companies in Europe, Australasia, and the Far East (EAFE).

MSCI Emerging Markets Index: An unmanaged index that tracks stocks in 26 emerging markets countries.

Russell 2000 Index: An unmanaged index that tracks the stocks of 2,000 small U.S. companies.

Russell 3000 Index: An index that tracks the performance of the 3,000 largest U.S. companies, representing approximately 98% of the investable U.S. equity market.

S&P 500 Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies.

Weighted average effective duration (years): A measure of a security’s price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

Weighted average maturity: A measure of a fund’s interest rate sensitivity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes. The weighted average maturity may take into account interest rate readjustment dates for certain securities. Money funds must maintain a weighted average maturity of less than 60 days.

Performance and Expenses

Growth of $10,000

This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.

Growth of $10,000

Fund Expense Example

As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.

Actual Expenses
The first line of the following table (Actual) provides information about actual account values and expenses based on the fund’s actual returns. You may use the information on this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number on the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes
The information on the second line of the table (Hypothetical) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Note: T. Rowe Price charges an annual account service fee of $20, generally for accounts with less than $10,000. The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $50,000 or more; accounts electing to receive electronic delivery of account statements, transaction confirmations, prospectuses, and shareholder reports; or accounts of an investor who is a T. Rowe Price Preferred Services, Personal Services, or Enhanced Personal Services client (enrollment in these programs generally requires T. Rowe Price assets of at least $100,000). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.

You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.

T. Rowe Price Spectrum Growth Fund

Unaudited